Data shows Polkadot crashes after reaching $1B open interest — Will it happen again?
Whenever there is relevant growth in the number of derivatives contracts currently in play (open involvement), it usually means that more than traders are involved.
In futures markets, longs and shorts are counterbalanced at all times, but having a larger number of active contracts allows the participation of institutional investors who crave a minimum market size.
However, in Polkadot'southward (DOT) case, price crashes accept frequently been anticipated past this indicator breaking the $1 billion mark.
The Apr 17 crash happened later on DOT reached its $48.30 all-fourth dimension high, which led to a $ane.two billion futures open involvement. Over the following week, the altcoin dropped 45% to $26.60, driving the number of active contracts to a $600 one thousand thousand equivalent.
Three weeks later, on May 15, a similar movement happened as Polkadot renewed its all-fourth dimension high to $49.80. This time around, a 68% crash followed over the side by side five days. Consequently, the futures open interest reached a 4-month low at $220 million.
Take observe of how Polkadot'due south 28% rally in the beginning 2 days of November led to a $53.30 record loftier and as well brought the derivatives indicator higher up the $1 billion marker.
The 18.9 million DOT development fund announced on Oct. 17 accentuated the rally already in identify ahead of the parachain auctions expected for mid-November. According to Polkadot's founder Gavin Wood, the $960 meg grant volition be used to build, improve and educate the network'due south growing ecosystem.
Projects are currently raising capital letter to bootstrap their parachain auctions and Polkadot investors who wish to back up any of those must lock their DOT into a sponsored business relationship. In return, investors are rewarded with air-dropped tokens from the project competing for the parachain slot.
What near the $54 billion question?
Does the electric current $1 billion "expiry mark" on Polkadot futures open involvement signal a potential crash or will it be different this time?
As previously explained, the open involvement metric can not exist deemed bullish or surly on a standalone basis. And then, to sympathize if derivatives traders are using excessive leverage, i should analyze the perpetual futures contract data.
This musical instrument is the retail traders' preferred derivative because its cost tends to track the regular spot markets.
To balance out their risk, exchanges will accuse a funding rate to whichever side demands more leverage and this fee is paid to the opposing side.
Neutral markets tend to display a 0% to 0.03% positive funding charge per unit, equivalent to 0.6% per week, indicating that longs are the ones paying it. The average rate ahead of the May 15 crash was a bit college at 0.075%, which is roughly 1.half-dozen% per week. At this fourth dimension, longs were not desperate to close their positions and in that location were no signs of excessive leverage.
Related: Is Polkadot eyeing $100 next? DOT cost jumps 25%, triggering aclassic bullish chart pattern
The simply possible determination is that a generalized market crash acquired investors and algo traders to desperately sell their altcoins, and thus derivatives markets were non the leading crusade for the crash.
Another comforting piece of information for Polkadot holders is DOT's current eight-60 minutes funding rate at 0.05%. This is slightly optimistic and nowhere near levels that are considered apropos. At the moment, there are no signs of a potential crash due to the $1 billion futures open involvement.
The views and opinions expressed hither are solely those of the author and practice not necessarily reflect the views of Cointelegraph. Every investment and trading motion involves risk. You should bear your own enquiry when making a decision.
Source: https://cointelegraph.com/news/data-shows-polkadot-crashes-after-reaching-1b-open-interest-will-it-happen-again
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